The Future of Superannuation and Young Australians
As Australia prepares for significant changes to its superannuation system, younger generations, particularly those in Generation Z, are likely to feel the effects. Recent modelling indicates that these young Australians could retire with superannuation balances exceeding $3 million, even if they earn only an average wage.
Beginning July 1, the Labor government intends to implement a revised tax structure, increasing the tax rate on earnings from super balances exceeding $3 million from 15% to 30%. This adjustment will primarily affect around 80,000 account holders, representing 0.5% of the Australian population.
However, according to Diana Mousina, AMP Capital’s deputy chief economist, this $3 million threshold may soon become the norm. She anticipates that at least half of Gen Z would breach this limit by the time they reach retirement age in approximately 40 years, influenced by wage growth and the benefits of compound interest.
Mousina cautions against underestimating the potential impact of the new tax. "Do you think that the proposed $3 million superannuation cap tax won’t impact you because the Labor government said it only impacts 0.5% of people now? Think again!" she stated. She emphasised that an average 22-year-old earning a typical income throughout their working life is likely to surpass this cap unless the government decides to adjust it for inflation.
The modelling bases its findings on expected average full-time earnings of $98,000 starting at age 22, with a projected annual wage growth of 3% and superannuation contributions maintained at 12%. If these individuals work until the age of 67, they could accumulate around $3.6 million in super. Under the current 15% tax rate, they would owe approximately $24,000 annually. Should the new rules come into effect, their annual tax burden could increase to $29,300.
Mousina expresses mixed feelings regarding the new policy, suggesting it would be more reasonable to index the thresholds to inflation and wage growth. Similarly, financial adviser Josef Jindra from Mintwell voiced concerns about the absence of indexation, stating, "Over the coming decades, its real value will steadily erode." He warns that without regular adjustments, the cap will unintentionally draw increasingly more Australians into a higher tax bracket—not necessarily due to extraordinary wealth, but rather as a consequence of prudent financial choices.
Currently, superannuation fund earnings are taxed at 15% during the accumulation phase, while the government’s proposed changes, which aim to apply a 30% tax on balances over $3 million, have yet to pass through parliament. There are calls from the Greens to lower the threshold to $2 million and adjust it in accordance with inflation.
Financial Services Council data suggests that if no adjustments are made, approximately 500,000 taxpayers, including 204,000 under 30, could surpass the $3 million cap over their lifetimes. Other proposed changes in the superannuation system include increasing the superannuation guarantee rate from 11.5% to 12%—the final legislated increase—and extending super contributions to include Parental Leave Pay. This change means that parents receiving government support will also accumulate an additional 12% super contribution.
Additional changes scheduled to take effect on July 1 include an increase in the transfer balance cap from $1.9 million to $2 million, allowing for more superannuation to be transferred into the retirement phase.
These impending adjustments to the superannuation landscape highlight the importance of awareness and proactive financial planning for younger Australians, who will likely motivate a growing conversation around superannuation structures and tax implications in the coming years.
